Fitch Ratings on Thursday reaffirmed India's sovereign rating at 'BBB-' with a negative outlook and said the second wave of coronavirus cases may delay the economic recovery, but is unlikely to derail it.
In June last year, Fitch had revised outlook for India to 'negative' from 'stable' saying that the coronavirus pandemic had significantly weakened the country's growth outlook and exposed the challenges associated with a high public debt burden.
India's rating balances a still strong medium-term growth outlook and external resilience from solid foreign-reserve buffers, against high public debt, a weak financial sector and some lagging structural factors. "The negative outlook reflects lingering uncertainty around the debt trajectory following the sharp deterioration in India's public finance metrics due to the pandemic shock from a previous position of limited fiscal headroom," it said.
Wider fiscal deficits and government plans for only a gradual narrowing of the deficit, put greater onus on India's ability to return to high levels of GDP growth over the medium term to stabilise and bring down the debt ratio, it added.
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The rating agency forecasted a 12.8 per cent GDP growth in fiscal year ending March 2022 (FY22), moderating to 5.8 per cent in FY23, from an estimated contraction of 7.5 per cent in FY21. However, it said, the recent surge in coronavirus cases poses increasing downside risks to the FY22 outlook.
"This second wave of virus cases may delay the recovery, but it is unlikely in Fitch's view to derail it. In particular, the strong rebound in 2HFY21 and ongoing policy support underpin our expectations for a recovery," it said, adding that the pandemic-related restrictions are likely to remain localised and less stringent than the national lockdown imposed in 2Q20. It also highlighted that the vaccine rollout has been stepped up.
India reported 3,14,835 new COVID-19 cases and 2,104 deaths due to the infection in the preceding 24 hours as of Thursday morning. The country has administered 13.58 crore vaccine doses as of Thursday evening.
Saying that fiscal metrics have deteriorated sharply in the context of the macroeconomic shock and efforts to support health outcomes and the economic recovery, Fitch said it estimates a general government deficit of 14 per cent of GDP in FY21 (excluding divestment) from 7.3 per cent in FY20, consistent with a deficit of 9.5 per cent for the central government.
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"Notably, part of the increase in the FY21 deficit (around 1.5 per cent of GDP) reflects increased transparency by bringing off-budget spending on budget. The government is repaying loans to the Food Corporation of India from the National Small Savings Fund and then to keep such subsidy spending on-budget," it said.
"We expect the general government deficit to narrow to 10.8 per cent of GDP (7.1 per cent central government), on the basis of our expectations of growth recovery and strong revenue performance in 2HFY21," it added.
Fitch said India's current ability to finance its deficits domestically is a strength relative to most 'BBB' peers as foreign currency government debt comprises only 6 per cent of total debt ('BBB' median 33%) and only 2 per cent of government securities are held by non-residents.
Fitch expects inflation to decline to an average of 4.4 per cent in FY22, after hovering above the Reserve Bank of India's 2-6 per cent target band for much of FY21. "Price pressures have moderated, even though both headline and core inflation remain near the upper end of the band. We expect the RBI to keep the policy rate stable in the coming year, following 115bp in cuts since March 2020."
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